Aster DM Quality Care Ltd Q1 FY2024 Concall Summary

Key Takeaways

• India drives the quarter, GCC shows underlying strength: India revenue grew 29% YoY and EBITDA 47%, while GCC revenue grew 22% excluding COVID testing income, demonstrating the core business is healthy even as restructuring drags on.
• PAT hit by one-time items, not operations: Reported PAT was weighed down by a INR 44 crores deferred tax liability from UAE corporate tax changes and INR 6 crores in restructuring costs; excluding these, PAT grew 87%.
• Asset-light model unlocks ROCE at the cost of margin optics: New O&M asset-light hospitals in Tier 3/4 locations carry no fixed revenue share and may dilute consolidated EBITDA margin, but management is explicit that ROCE increases significantly.
• Pharmacy strategy pivots from scale to ecosystem: The earlier target of 500 pharmacies in 3 years is cut to ~300, with the focus now on consolidation around hospital catchments, mitigating cash burn, and reaching breakeven by early H1 or H2 of next year.
• What to watch next quarter: Whether the GCC carve-out reaches definitive documents, the pace of India occupancy in the seasonally strong Q2, and whether Aster Lab India hits month-wise EBITDA breakeven by end of Q2.

India Business: The Growth Engine

• Revenue and EBITDA surge: India revenue grew 29% YoY and EBITDA 47%, with PAT up 115%, driven by new hospital commissioning and ARPOB increases.
• ARPOB growth levers: A 58-60% cash payer mix gives capacity for price increases, while geography mix and a shift toward high-end quaternary procedures (DBS, cochlear implants, TAVI, transplants) lift the case mix. TPA agreements are multiyear so no YoY increase, but every 2-3 years a jump is possible. State government schemes do not allow pricing control.
• Q1 seasonality absorbed: Q1 always carries cost pressure from April increments while price increases trickle down slowly; India still delivered strong numbers.
• Q2 outlook: July occupancy is doing well and medical specialties typically perform strongly in Q2; management expects further growth.
• Capacity expansion underway: Aster Whitefield Bangalore Phase-II (275 beds) expected operational in September 2023; Aster MIMS Kannur and Aster Medcity Kochi each adding 100 beds; Aster Hospital Kasargod (200 beds) and Aster Capital Hospital Trivandrum Phase-I (350 beds) being built.
• O&M asset-light model scaling: Aster PMF Hospital Kollam commenced August 2023 under a purely variable revenue share with no fixed component. Aster G Madegowda Hospital (Mandya, 100 beds) started this quarter. Aster Narayanadri (Tirupati, ~150 beds, started 2 quarters back) has already broken even.

Dr. Azad Moopen: "One, bringing care to places where it is not available. And second, to get a very high ROCE, while there may be some dilution on our EBITDA margins."

GCC Business: Underlying Strength, Restructuring Overhang

• Revenue growth ex-COVID: GCC revenue grew 18% reported, but 22% excluding COVID testing and vaccination income, highlighting the strength of the underlying business.
• Hospital vertical: A 19% revenue increase driven by higher operational bed count.
• Occupancy held at 51%: Despite significant capacity expansion, occupancy remained consistent, which management attributes to operational efficiency and ability to meet rising demand.
• Clinics and pharmacy: Clinics grew 16% reported (27% ex-COVID testing). Pharmacy performed strongly across e-pharmacy and retail in-store formats.
• EBITDA growth: GCC EBITDA grew 27%; excluding operational losses from new hospitals and non-recurring expenses, growth was 34%.
• New capacity coming: Medcare Royal Specialty Hospital Al Qusais (126 beds, with oncology) expected operational by Q4 FY24, between December and February. Sanad Hospital Saudi Arabia annex building expected operational in Q2 FY24.
• Saudi Arabia expansion: Seen as a major growth market; Saudi pharmacies anticipated to start later in October 2023.
• Zest Pharmacy launch: A premium wellness concept launched in partnership with Spinneys in UAE, with plans to open 25 stores within 2 years.
• Restructuring delayed but progressing: The GCC business separation is taking longer than expected due to complexity; management is in discussion with a shortlisted bidder and says the process is moving in the right direction, but declined to disclose timeline or valuation. Promoters expressed interest in continuing to participate in the GCC business and holding a stake in the buyer entity.

Dr. Azad Moopen: "Given that the promoters have decades of experience and goodwill in the GCC region, their involvement is core to the intrinsic value of the GCC business. Being a complex transaction with sale and separation of a material overseas subsidiary, the process is taking longer than expected."

Pharmacy & Lab: The Path to Breakeven

• Pharmacy strategy reset: The earlier plan of 500 pharmacies in 3 years is now scaled to ~300, focused on creating an ecosystem around hospitals rather than a large standalone rollout, reducing both rollout cost and cash burn.
• Current phase is consolidation: The next 6 months are dedicated to consolidation, mitigating cost expenses, and improving customer experience. After breakeven, management will evaluate expansion into new geographies like Andhra and Maharashtra.
• Breakeven timeline: Management hopes to stop losses and reach breakeven by early H1 or H2 of the next year.
• Margin improvement plan: By the time pharmacy stabilizes, management expects to have a larger share of own-brand products delivering better margins, which would make larger numbers possible if individual stores become profitable.
• Aster Lab India: Started 2-2.5 years back; profitability is just beginning on a monthly basis. Management hopes to reach month-wise EBITDA breakeven by end of next quarter, and definitely by end of the year.

Dr. Azad Moopen: "We were not looking at earlier while we started off, we thought that it has to be large rollout across many regions. But later, as we mentioned, and you also mentioned now, we thought that we have to create an ecosystem around our hospitals. So, that doesn't require a huge rollout of like what we mentioned earlier of 500 pharmacies in 3 years and all. We think that we will be able to do that with 300 pharmacies is what we are now thinking."

PAT Bridge: One-Time Items Mask Operational Performance

• Deferred tax liability: A one-time, non-cash charge of INR 44 crores was created below the EBITDA line due to upcoming UAE corporate tax changes. The liability arises from a timing difference: book profit reflects goodwill amortization, but under the new GCC tax regime, goodwill amortization is not permitted for tax purposes, creating a tax loss. This applies to all acquisitions made to date.
• Restructuring costs: INR 6 crores in adviser, diligence, and legal costs related to the GCC carve-out were expensed as period costs in Q1.
• Underlying PAT growth: Excluding these exceptional items, PAT grew 87% YoY.

Post-Restructuring: GCC-India Synergies

• myAster app: Management will look at utilizing the myAster app in India via one-time purchases or licensing arrangements post-restructuring.
• Medical value travel: Patient movement from GCC to India and doctor/nurse movement between entities will be managed at arm's length method pricing.
• Promoter participation funding: Promoters do not require a pledge increase to finance participation in the GCC carve-out, because money brought from outside India as FDI can be repatriated via dividends.

Guidance & Commitments

Key Metrics